January 09, 2013

The battle is renewed: state capitalism, mercantilism, and liberalism

My new
Project Syndicate column deals with the age-old battle between the liberal
and mercantilist models of capitalism.
While liberalism has won the intellectual fight, the real-world battle
is still on, and is likely to shape the future of the world economy.

[I]t is more accurate to
think of mercantilism as a different way to organize the relationship
between the state and the economy – a vision that holds no less
relevance today than it did in the eighteenth century. Mercantilist
theorists such as Thomas Mun were in fact strong proponents of
capitalism; they just propounded a different model than liberalism.

The
liberal model views the state as necessarily predatory and the private
sector as inherently rent-seeking. So it advocates a strict separation
between the state and private business. Mercantilism, by contrast,
offers a corporatist vision in which the state and private business are
allies and cooperate in pursuit of common objectives, such as domestic
economic growth or national power.

The
mercantilist model can be derided as state capitalism or cronyism. But
when it works, as it has so often in Asia, the model’s
“government-business collaboration” or “pro-business state” quickly
garners heavy praise. Lagging economies have not failed to notice that
mercantilism can be their friend. Even in Britain, classical liberalism
arrived only in the mid-nineteenth century – that is, after the country had become the world’s dominant industrial power.

Coincidentally, my good friends Daron Acemoglu and Jim
Robinson pre-empted me by a couple of days with their own Project Syndicate piece
on “state capitalism”:

state capitalism is not about efficient allocation of economic
resources, but about maximizing political control over society and the
economy. If state managers can grab all productive resources and control
access to them, this maximizes control – even if it sacrifices economic
efficiency.

As this excerpt makes clear, their take is
complementary to (but also partially at odds with) mine. The two pieces make great companions and should
be read together.

Comments

Dr Rodrik,
Having read both articles, there are a few points I'd ask you to adress.
First, A&R believe state capitalism will be incapable of sustained economic growth, but only catch up growth. It seems their hypothesis is that state capitalism is decreasingly effective as a country develops. Would you consider mercantilism a viable alternative for the developed countries as well?
Second, were the previous answer to be positive, it still seems like mercantilism is a good option when only a few countries follow this model. What if, however, mercantilist practices were the norm?
My last comment is that the difference in the conclusions of both articles is, in part, a question of semantics. Your definition of mercantilism is that of an alliance between private and public sectors; meanwhile, R&A rely on a self-interested government to express their point.
Whatever the case, I found both pieces most enlightening. Keep up the good work.

If you have been following Prof. Rodrik's works, you will know his answer to your first question already: "state capitalism" does have diminishing returns. According to the second-best model, or "mercantilism" as it is called in this article, which Prof. Rodirk is a strong advocate of, the state is supposed to initiate a new round of reform to overcome the institutional limits.

Industrial policy or whatever names we want to call it, does allow developing economies to catch up by handing out rents; this is predicted by the big push model as well. The question is what comes next and how to prevent it from turning into crony capitalism or a kleptocracy. We don't even need to talk about China; Japan and Korea are still far from being the liberal, transparent and deliberative democracy that we come to admire.

The problem is not so much with the economics as with the politics. Politically, there is no or very little incentive for a new round of political and democratic reform, when the ruling party can reap so much benefit from and with the power of the state.

As for your second question, developed countries do practice mercantilism in some capacity. The internet is the outcome of that (A&R is wrong about state capitalism is all about getting power). If that is extended to trade more generally, my guess would be intrastate or regional trade will replace part of the international trade. Mayhaps it will not be a bad thing.

business. Mercantilism, by contrast, offers a corporatist vision in which the state and private business are allies and cooperate in pursuit of common objectives, such as domestic economic growth or national power. Click here

Express capitalism could be the ownership and management regarding corporations with a sovereign federal government. This arises generally within energy, healthy reference, and armed forces technological know-how areas. Common for example the actual countrywide gas corporations regarding Italy and Venezuela. In certain varieties, the state of hawaii performs freely traded in corporations, while other options entail companies financed and used fully via federal government routes. As a hybrid type of open public and exclusive organization, the appropriate function and features about point out capitalism remain questionable.

The question is what comes next and how to prevent it from turning into crony capitalism or a kleptocracy. We don't even need to talk about China; Japan and Korea are still far from being the liberal, transparent and deliberative democracy that we come to admire.Click here

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